The monumental $16 billion Facebook initial public offering was destined to mark another incredible chapter in the young company’s life. Instead the dorm-room-born social networking juggernaut, starring in the world’s biggest IPO, faces shareholders fuming over $33 billion dollars in market cap losses (to date) and a public embarrassment that has tarnished the reputation of lead banker Morgan Stanley and the Nasdaq stock exchange which listed Facebook shares for public trading.
Investors became angry after it came to light that a Morgan Stanley analyst cut his earnings forecasts for Facebook just a few days ahead of the IPO, but he only told Morgan Stanley’s major clients, rather than making the forecasts public knowledge. Critics are also livid that the increase in offering size and price, largely driven by greed, contributed to the epic fail. Is it time for reputation management?
Morgan Stanley’s CEO James Gorman, stands behind his firm’s role in the fiasco, claiming that Morgan Stanley absolutely acted “100% within the rules.”
Nasdaq Stock Market is also feeling the heat, Morgan Stanley’s CEO Gorman is vocal in placing the blame on Nasdaq. While Morgan Stanley may have failed to disclose relevant information relating to Facebook’s future earnings, Nasdaq is faced with massive trade order and execution failures on the critical first day of trading. This caused a 30-minute delay in the opening, which ultimately hobbled the offering. As a result, Facebook’s shares ended up about $.23 on its opening day, thanks primarily to support given to the flailing offering by Morgan Stanley and other underwriters.
On Monday, when trading resumed and the technical issues had been resolved, Facebook was punished by shareholders sending the stock well below its offering price. A little over a week later, short sellers entered the fray betting on further declines. Today, Facebook hovers around $26 a share. Class action lawyers are swarming.
Additionally, Nasdaq is facing a lawsuit brought by a Facebook investor, claiming that Nasdaq’s mishandling of the IPO caused confusion over which shares were purchased and cancelled successfully. Ultimately, the lawsuit states, those wanting to purchase Facebook shares were unable to do so and those trying to sell shares into the declining market on the first day of trading experienced delays and lack of liquidity.
Facebook is currently under a mandatory “quiet period” that extends 40 days after the launch of the IPO, so they have yet to publicly comment on the fiasco. The pictures from Mark Zuckerberg’s wedding and European honeymoon don’t seem to attracting a lot of “likes” — individual investors who feel burnt by the media hype and even institutional investors are claiming hundreds of millions of paper losses following the mishandling of the offering by the lead underwriters and Nasdaq.
In the short term, the IPO market for tech companies is flatlined. Morgan Stanley will have a lot of explaining to do when courting new investment banking engagements in Silicon Valley. Nasdaq is going to have to convince companies seeking listings on the electronic exchange that the trading gaffes were an aberration. And all the while, NYSE Euronext is rubbing its hands together like Mr. Burns.